EBITDA: Definition, Calculation and Use in Corporate Finance

Make an appointment

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is one of the most widely used financial metrics in business, particularly among investors, bankers and financial analysts. It measures operational performance before financial (interest), tax, and non-cash (depreciation/amortization) elements.

EBITDA Definition

EBITDA measures a company's operating performance before interest, taxes, depreciation, and amortization. It represents the cash generated from core business operations, independent of capital structure and accounting choices.

Calculation formula:

EBITDA = Net Income + Taxes + Interest Expense + Depreciation & Amortization

Or equivalently:

EBITDA = Revenue - Operating Expenses (excluding depreciation)

Why is EBITDA So Important?

EBITDA is valued by investors and analysts for several reasons.

Comparability: By neutralizing capital structure and depreciation policy effects, EBITDA allows performance comparison between companies independent of financial engineering.

Cash generation proxy: EBITDA approximates cash-generating capacity, which is why valuations often use EBITDA multiples (e.g., 'valued at 8x EBITDA').

Loan covenants: Banks often require minimum debt/EBITDA ratios in loan agreements.

EBITDA Interpretation

Positive EBITDA means generating value from operations. Negative EBITDA signals distress.

EBITDA margin (EBITDA/Revenue) indicates operational profitability. 15-20% is good for most sectors; SaaS typically targets 20%+.

An Outsourced CFO can help calculate and contextualize your EBITDA within your industry and identify improvement levers.

FAQ - EBITDA

Is EBITDA reliable? It's useful but imperfect. It ignores maintenance capital expenditure and working capital needs. Complement with free cash flow for complete analysis.

What's good EBITDA? No universal standard. Interpret by sector and development stage. Growth-stage startups may have negative EBITDA while being healthy.

Testimonials

They talk about us

Discover our clients' feedback on our finance and human resources support.

Let's talk about your project

Make the right choices. Now. Say no to the status quo and choose proximity, efficiency and flexibility with Iter Advisors.

Book a meeting